The Arbitration Process
Here’s a terrific short blurb about the salary arbitration process in baseball from mlbtraderumors.com. It talks about how baseball’s salary arbitrators tend to value back-of-the-baseball-card stats like wins, ERA, batting average, RBI’s, saves and holds, rather than more recently developed metrics such as Wins Above Replacement which more accurately value a player’s total contribution toward winning major league baseball games. As a result, arbitrators may value a player’s contributions higher or lower than his own team does.
This is not terribly surprising. Many institutional factors in the arbitration process contribute to this over- or under-valuing. The main reason is that arbitration is a legalistic process which relies very, very heavily on precedent — i.e., what other players with similar levels of experience and performance have been paid prior to the salary arbitration case to be decided.
The Major League Baseball Players’ Association negotiated the right to binding salary arbitration for players with two years of major league service time in the early 1970’s (most likely starting after the 1973 season, according to Marvin Miller’s book A Whole Different Ball Game — his book is a little unclear on this point). At that time, none of the new-fangled statistics existed, teams thought that .300 hitters who didn’t have power or walk much were a lot more valuable than we now know they are, and RBIs were seen as the be-all and end-all of offensive production.
As such, the old-line stats became the basis for all salary arbitration awards and got locked in for the future through precedent. Further, I suspect that most of baseball’s salary arbitrators are older and very experienced, making them both loath to deviate from precedent and suspicious of the new, more accurate statistical analysis.
Very quickly after the players negotiated the right to binding salary arbitration, which prevented tight-wad teams like Charlie Finley’s Oakland A’s and Calvin Griffith’s Minnesota Twins from wildly underpaying their stars, owners discovered that binding salary arbitration guaranteed huge raises for most players eligible for arbitration even if their cases were litigated and lost by the players. As a result, one of the big bones of contention between owners and players has been the owners’ desire for give-backs on, if not complete elimination of, salary arbitration.
In the early 1980’s, the Players Association agreed to raise the service time requirement for arbitration eligibility from two years of service to three years of service. Despite much hard bargaining subsequently, the players have only been able to negotiate a reduction to include the 17% of players with the most major league service between two and three seasons.
Today, it appears that the owners have finally come to terms with binding salary arbitration, both because it has now been around for almost 40 years and also because in the last ten years, teams have begun to non-tender large numbers of arbitration-eligible players who would otherwise be virtually guaranteed substantial raises through the arbitration process.
At the time that the Players’ Association won the right to free agency through grievance arbitration in 1976, A’s owner Charlie Finley was the only owner with the foresight to see that if arbitrator Peter Seitz’s decision was actually carried out (all players could become free agents after roughly two years of major league service), there would be a huge glut of players on the open market every off-season, which would push down salaries for all but the best few players at each position.
While the other owners didn’t see this because they were too locked in to their collective mind set of controlling players totally for their entire careers, Players’ Association director Marvin Miller did. He agreed to a six-year service requirement for free agency, because he saw that this would mean relatively few free agents each off-season and those players who reached free agency at all would generally be star players. As a result, free agent contract amounts would go through the roof based on simple supply and demand principles. Once that happened, players with less experience but sufficiently high past performance could boot-strap on the huge free agent contracts through binding salary arbitration. Modern player salaries are the consequence of this system and the Players’ Association’s foresight.
Now that all of the teams are non-tendering significant numbers of arbitration-eligible players, it has created a glut of middle relievers and utility players on the open market, which has held salaries down for these players. If a solid but unspectacular middle reliever stands to get a huge raise through salary arbitration, his team can non-tender him and find a similar player on the open market for substantially less money.
The upshot is that binding salary arbitration has matured to point where players will never, ever agree to its elimination and owners at least live with its consequences given their ability to non-tender players they consider undeserving of huge raises. At this point, all I can see is minor tweeks to this system — for example, raising salary arbitration eligibility back to three full years of major league service in exchange for eliminating any deterrents to signing free agents (i.e., signing teams would no longer lose a draft pick when signing a top free agent).